Macro Theme:

Key dates ahead:

Founder’s Note:

Futures are up 40bps, staging the SPX to the 6,850 area.

TLDR: We continue to favor upside into year end due to potential vol crush, but that hope is gone with an SPX move <6,840 – which is now our Risk Pivot

(we are short <6,840 vs <6,800 on Friday). We raised the Pivot as traders have added downside puts, which increases negative gamma below.

We have something of a similar to picture to Friday in that SPX has the supportive upside if it can get >6,900, but there is a nasty, soft underbelly <6,850. For today, if 6,850 is held through the AM that may allow vol to contract and push the SPX back into 6,900. We think a close >6,900 strongly increases the chances of a 7k test by year end.

To the downside, as you can see in TRACE <6,850 the map is mainly red, and there is now a chunky ~18k, non-0DTE trader long put position (dealer short) at 6,800, which would help to accelerate downside in through that strike. For this reason we now shift our Risk Pivot to 6,840, from 6,800.

Turning to vols, we see IV’s are this AM sticky to Friday’s close, if not higher. Skews are lifting, meaning the cheap ~9% upside calls into EOY are gone (now ~11%), and the put wing is bid, too. That said, the ATM IV’s are still reasonably low, with the SPX term structure below showing ~11% IV for next week and that rises only modestly into 13% for Jan. Our takeaway from this is that we have the energy now to squeeze some short-dated vol premium that built up with Friday’s selling, and that can give markets the final push to ~7k (remember the JPM 12/31 call is 7k). This can come with benign data this week in the form of NFP, CPI and VIX exp OPEX.

That being said – this is also a market that is adding hedging the downside, but is not yet fully committed. This is in the data: SPX Put Skew %’ile is 85% (high) which tells us traders are starting to buy the put wing, but IV Rank overall is just 5% (low). This is a dangerous stance because there is now some dealer negative gamma below – the “tinder” that can spark a fire. This positioning is why we raised our Risk Pivot from 6,800 to 6,840 – we don’t trust the 6,800 area cushion any longer.

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